Friday, March 30, 2012
Posted by D. Daniel Sokol
Richard Stockton Higgins, FSGexperts and Mark Perelman, explore Coordinated Conduct: A Review of Preconditions for Profitability and Stability.
ABSTRACT: We have investigated the likelihood of cartel formation within various oligopoly models relying on various previous works which analyzed cartel profitability as well as cartel stability in the sense of d’Aspremont, Jacquemin, Gabszewicz and Weymark (1983). Specifically, a cartel is considered stable whenever no outsider desires to join and no insider desires to defect even though for a given cartel size, outsiders may earn more than insiders. Our review has addressed the basic structural preconditions for profitable cartel formation when some but not all firms in a market engage in coordinated pricing and production. We think that prior to consideration of the various factors that influence the profitability of establishing and enforcing an agreement, a structural screen is appropriate.